How to Analyze the Value of a Public Chain Like an Insider
Last weekend we analyzed why popular public chain projects emerge one after another, and reviewed 12 mainstream public chain projects. I believe many people are interested in public chain projects and concepts, but there are numerous public chain projects in the market, making it confusing. How can you analyze the value of a public chain like an insider to discover "potential" public chains?
This article will teach you how to analyze the value of a public chain from two aspects: the impossible triangle of public chain economic mechanisms and the impossible triangle of technical mechanisms.
Public chains, as the infrastructure of the entire industry, have always been favored by many investors due to their high value ceiling. This year, public chain projects have continued to explode, enabling participants to obtain excess returns, which has attracted public attention to projects in the public chain sector.
However, there are currently as many as 40-50 well-known public chain projects in the market, and various types of public chains are constantly being developed. In this situation, as an investor, how can you discover potential public chains? Or how to analyze the public chain projects you see like an insider?
Technical Model Impossible Triangle: A Difficult Choice
We know that the "impossible triangle" of blockchain: decentralization, security, and efficiency, also constrains all public chain projects. Almost all public chain projects need to prioritize these three aspects according to their own characteristics during development, or find a balance point among the three, so that the developed public chain meets market needs and establishes its competitive advantage.
From the perspective of "decentralization," the lower the barrier to participation, the more people can participate in consensus, which is more conducive to decentralization. Decentralization has many benefits for the entire public chain network, such as: strong fault tolerance, not easily attacked, data cannot be tampered with, etc. This will attract more people to participate in ecological construction, thereby increasing the value of the public chain. The setting of participation barriers can be manifested in many ways, such as setting a limit on the minimum configuration of network bandwidth for each consensus node, not exceeding 20 Mbps, etc.
From the perspective of "security," whether the public chain requires all nodes to synchronize and verify largely determines the security level of the public chain, because in the public chain network, its correctness and security rely on the endorsement of some nodes. For example, in chains based on PoW, every miner needs to ensure correctness when mining blocks. It can be said that every node in the entire network helps users guard against illegal Trading; while in chains based on PoS or DPoS, super nodes endorse the correctness of blocks. Therefore, relatively speaking, public chains based on PoS or DPoS have more security weaknesses than public chains based on PoW, but their performance is relatively higher because their block confirmation times are relatively shorter. This is a trade-off between high security and fast confirmation times.
From the perspective of "efficiency," the size of TPS data, which is the average throughput of final confirmed transactions, can show how efficient a public chain project is and whether its performance is high enough. High-performance public chains can quickly process more Trading per unit time, thereby supporting more projects and a richer ecosystem.
Currently, for the impossible triangle, each public chain project must provide its own solution. For example, public chains known for high performance such as SOL and LUNA focus on efficiency; ETH 1.0 focuses on decentralization; new asset public chains such as Flow and Diem focus on security, etc.
In the current market, no solution occupies an absolute advantage, or is absolutely correct. As long as a public chain emerges at the right time, or combines its technical characteristics well with its target audience, it is a good public chain, leading to a value explosion. For example, this year's boom in DeFi, NFT, etc., required faster transaction speeds and lower gas fees. Public chain projects known for high performance took the opportunity to rise rapidly.
If you later see a public chain project claiming to have high TPS and can scale infinitely, then you need to look at which corner of the impossible triangle it gave up? Whether its claimed points meet current market needs, and whether the points it gave up will have a fatal impact on its future plans? This can roughly show whether the public chain project is reliable and whether it has the possibility of exploding in the future.
Economic Mechanism Impossible Triangle: A Designed Future
If the solution to the technical impossible triangle is the foundation for whether a public chain project can succeed, then the design of the economic mechanism is the superstructure of the public chain project, largely determining the upper limit or even success or failure of the entire public chain system.
The impossible triangle of public chain project economic mechanism design is: fairness, growth, and profitability. Different public chain economic mechanism designs make choices back and forth among these three dimensions, looking for a balance point. Then time and scale will amplify these tiny design differences, thereby affecting the development speed and upper limit of a public chain project.
From the perspective of "fairness," whether different participants (miners, early investors, core team, developers, later investors) have the same opportunities or probabilities to participate in the issuance and distribution of mainnet tokens, and whether anyone has privileges. Although fairness is a very subjective matter and it is difficult to have absolute fairness, as a public chain project, if mechanisms such as mining, holding, and voting governance can be designed relatively fairly and reasonably, it will have a great effect on community building and attracting users and potential users. These are key factors in whether a public chain project can succeed.
From the perspective of "growth," the value increase of public chain projects mainly comes from two pathways: one is to increase value through its own clear value anchoring and ecological construction; the other is to rely on the general market environment, that is, the value overflow of a super bull market. Obviously, the first one can be long-lasting and has a higher value ceiling. From the first perspective, the growth of a public chain project is reflected in these aspects: issuance speed, that is, whether the inflation rate of the public chain project token is reasonable; whether the mortgage and locking mechanisms are reasonable and can attract users to participate for a long time; whether the cost for early investors to obtain tokens is too high. If the cost is too high, it will cause a high-quality project to have no "growth" because later participants need higher costs to participate, which is obviously not conducive to the long-term development of the project.
From the perspective of "profitability," the team's profitability is the main connotation, and the means mainly include: block taxation, early investor investment, pre-mining, governance, donations, running their own mining pools, mining machines, super nodes, etc. The team needs to support itself and be responsible to investors, so it has to place how the team makes money in an important position. However, as designers of the public chain economic mechanism, if too much emphasis is placed on the team's profitability, it will suppress the returns of users and partners, resulting in an awkward situation where no one participates. Therefore, in profitability design, the team needs to comprehensively consider and balance the interests of all parties such as the team, users, and partners to achieve win-win results and long-term development.
Just like the technical impossible triangle, almost all public chain projects can only occupy at most two points of the above triangle when designing their own economic mechanisms. Economic mechanism design not only reflects the trade-offs of the project team in terms of values, but more importantly can intuitively see the focus of subsequent project development and important development nodes.
Finally, it needs to be emphasized that the entire blockchain industry is still in a nascent chaotic state, and public chain projects are no exception. Therefore, there will be many irrational factors. As participants, the most important thing is to have your own independent thinking and make your own judgments.
Conclusion
In the early stage of the industry, public chain projects will undoubtedly become the protagonists. Their development speed and maturity will largely determine the development speed and maturity of the entire industry. In the upcoming market, more public chain projects may be developed and gain market recognition, thereby increasing their own value.
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